Rate Cut Cycle Begins, Fed Cuts its Key Interest Rate by a Half-Point

The market expectation ahead of the meeting were roughly a coin toss but the Fed pulled the trigger on a half-point.

Federal Reserve FOMC Statement

Please consider the Federal Reserve FOMC Statement.

Recent indicators suggest that economic activity has continued to expand at a solid pace. Job gains have slowed, and the unemployment rate has moved up but remains low. Inflation has made further progress toward the Committee’s 2 percent objective but remains somewhat elevated.

The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. The Committee has gained greater confidence that inflation is moving sustainably toward 2 percent, and judges that the risks to achieving its employment and inflation goals are roughly in balance. The economic outlook is uncertain, and the Committee is attentive to the risks to both sides of its dual mandate.

In light of the progress on inflation and the balance of risks, the Committee decided to lower the target range for the federal funds rate by 1/2 percentage point to 4-3/4 to 5 percent. In considering additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks. The Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage‑backed securities. The Committee is strongly committed to supporting maximum employment and returning inflation to its 2 percent objective.

In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals. The Committee’s assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments.

Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Thomas I. Barkin; Michael S. Barr; Raphael W. Bostic; Lisa D. Cook; Mary C. Daly; Beth M. Hammack; Philip N. Jefferson; Adriana D. Kugler; and Christopher J. Waller. Voting against this action was Michelle W. Bowman, who preferred to lower the target range for the federal funds rate by 1/4 percentage point at this meeting.

In early July my guess was the Fed would cut rates by a half-point. I was correct but the path was shaky.

Following the CPI report on September 11, the odds dipped to 15 percent.

For discussion, please see The Cost of Rent Up 0.4 Percent Again, CPI Rises 0.2 Percent in August

However, over the next two days the odds of a 50-basis point cut jumped to as high as 65 percent on a favorable PPI report and import-export prices.

So here we are.

Note that my prediction is what I expect the Fed to do, not what I think they should do.

For discussion, please see Elizabeth Warren Asks the Fed for a Three-Quarter Point Interest Rate Cut